Earnings Call Transcript - PSA Q4 2024

Ryan Burke, Investor Relations

Thank you, Rob. Hello, everyone. Thank you for joining us for our fourth quarter 2024 earnings call. I'm here with Joe Russell and Tom Boyle. Before we begin, we want to remind you that certain matters discussed during this call may constitute forward-looking statements within the meaning of the federal securities laws. These forward-looking statements are subject to certain economic risks and uncertainties. All forward-looking statements speak only as of today, February 25, 2025, and we assume no obligation to update, revise, or supplement statements that become untrue because of subsequent events. A reconciliation to GAAP of the non-GAAP financial measures we provide on this call is included in our earnings release. You can find our press release, supplement report, SEC reports, and an audio replay of this conference call on our website, publicstorage.com. We do ask that you initially limit yourselves to two questions. After that, if you have more, of course please jump back in queue. With that, I'll turn the call over to Joe.

Joe Russell, President & CEO

Thank you, Ryan and thank you all for joining us today. Tom and I will walk you through our performance, industry views and outlook. Then we'll open it up for Q&A. I will focus on three key themes. First, we ended 2024 on a positive note with results that reflected the stabilization we are driving across our business. We began 2024 by pointing out that a handful of markets were improving sequentially and that we expected more would follow suit. They did and we ended the year with nearly all markets having inflected and we are seeing broad operational stabilization. As a result, our quarterly same-store revenue growth improved sequentially for the first time in more than two years. This, coupled with strong performance in our sizable non-same-store pool and ancillary businesses, helped drive core FFO per share growth positive. Similar to same-store revenues, this is the first sequential improvement in more than two years. Simply put, industry and portfolio fundamentals are steadily heading in the right direction. Second, we are inspired by the strength and perseverance of the Los Angeles community following the tragic fires nearly two months ago. We have a longstanding and deep connection here and we empathize with those that have been affected. I am very proud of the team for keeping our properties secure and open to serve our customers. We welcome our new customers and thank them for choosing us in their time of need. We are deeply experienced in navigating states of emergency and look forward to Los Angeles reemerging as a long-term outperformer among self-storage markets. In the meantime, we are driving operational stabilization across the rest of our portfolio and we expect sequential improvement to continue outside of Los Angeles in 2025. Third, through portfolio enhancement, industry-leading innovation and company-wide competitive advantages, we have positioned ourselves for opportunity as the industry environment improves. We recently completed the Property of Tomorrow program, a multi-year and more than $600 million investment into holistically rebranding our entire portfolio nationwide. This has further enhanced our brand positioning within local markets. As a result of completing the program, we expect our annual retained cash flow to increase from $400 million in 2024 to approximately $600 million in 2025, providing additional liquidity to grow our portfolio. Our digital transformation is advancing and further connecting all aspects of our business. Adoption by customers has been particularly swift with self-selected digital adoption of our customer interactions and transactions, a significant increase from around 30%. The platform digitalization has helped drive our implementation of a new and more efficient operating model. One of the many ways we are flexing the platform and using AI is to staff properties more appropriately. We are now meeting customers when and where they need us instead of always having someone on site for nine hours every day. As a result, we've reduced on-property labor hours by nearly 30% and there's more to go. Importantly, we are doing so while also driving satisfaction higher among our customers and the 6,000-member property operations team. We are also actively rolling out our solar program, reaching nearly 900 properties and with more growth ahead. Our strong progress so far has resulted in a 30% reduction in utility use which benefits our financial profile and the environment. These are just a few of our many active initiatives and we are excited about further operational enhancement to come this year and beyond. With that said, we are mindful of the challenges that the industry still faces including competitive customer move-in dynamics. Our team and strategies are calibrated appropriately as we are driving improvement across our portfolio. Now I'll turn the call over to Tom.

Tom Boyle, Chief Financial Officer

Thanks Joe. On the capital allocation front, we have a $740 million development pipeline to be delivered over the next two years through our in-house team as we continue to invest while industry volumes declined. Acquisition activity has picked up with 26 properties acquired or under contract for $361 million in the fourth quarter through today. We expect greater acquisition activity in 2025 than we had in 2024. With fundamentals improving in a multi-year period of declining competitive new supply, we are poised to increase activity. As always, our capital and liquidity positions are strong. Industry-leading leverage, balance sheet capacity and cost of capital have us positioned to execute across our growth channels. Now shifting to our financial performance. We achieved core FFO of $4.21 per share in the fourth quarter, a 20 basis point increase year-over-year. This was strong sequential improvement from the 300 basis point decline experienced during the third quarter. Same-store revenues declined 60 basis points year-over-year in the fourth quarter, also improving sequentially from the 130 basis point decline experienced in the prior quarter. Move-in trends are improving, existing customers are behaving well and occupancy is at a level that puts us in a good position as fundamentals inflect. As Joe mentioned, we expect the sequential improvement to continue across the portfolio outside of Los Angeles. Same-store expenses increased 90 basis points year-over-year with growth in property taxes offset by staffing optimization and additional expense controls. Now turning to the outlook for 2025. We introduced core FFO per share guidance of $16.35 to $17 with a midpoint that is consistent with 2024. This includes an estimated $0.23 per share impact from pricing restrictions resulting from a state of emergency declared by the Governor of California in response to the fires. Excluding the impact, the midpoint would have called for a 140 basis point increase in core FFO per share year-over-year. Looking at the same-store, the midpoint calls for revenues to be down slightly year-over-year. This includes an estimated 100 basis point impact from the restrictions in Los Angeles. At the midpoint, we are assuming that move-in rents are down 5% year-over-year on average. We are also assuming that occupancy is down 10 basis points on average, an improvement from where we finished 2024. And as we've consistently seen, we believe existing customer behavior will remain steady. We expect 3.25% same-store expense growth at the midpoint, primarily driven by property taxes and offset by the initiatives that Joe spoke to. This leads us to same-store NOI declining 1.4% at the midpoint. As I noted earlier, we anticipate higher acquisition volumes in 2025. We've included the identified $140 million of closed and under contract volume, but we did not include any unidentified acquisition volumes in the range. Our outsized non-same-store portfolio of over 500 properties is poised to be a strong contributor again in 2025, with $454 million of NOI assumed at the midpoint. They will continue to be an engine of growth, with additional NOI upside of $80 million beyond 2025, through stabilization. As we enter 2025, Public Storage is on solid footing following two years of demand and growth normalization. Our completed Property of Tomorrow enhancement program, industry-leading transformation initiatives, sizable and high growth non-same-store pool properties, and growth-oriented balance sheet will have us positioned for improving fundamentals and increased transaction market activity moving forward. Rob, let's open it up for Q&A.

Ryan Burke, Investor Relations

Rob, this is Ryan. Are you there with us?

Operator, Operator

Yes, I'm here.

Ryan Burke, Investor Relations

Let's go ahead and open it up for Q&A, please.

Operator, Operator

Operator provided instructions on how to ask questions.

Jeff Spector, Analyst (Bank of America)

Great, thank you. Thanks for the additional information in your opening remarks. Tom, can you talk a little bit more about the assumptions on street rate? I think you said you're assuming on average during '25 down 5%, and occupancy down on average slightly. I think you said 10 basis points, but most specifically the street rate assumption. How do you derive that? Thank you.

Tom Boyle, Chief Financial Officer

Yes, sure. Thanks Jeff. So let me start with an update on year-to-date performance, and speak to what we've seen to start the year. We've seen continued levels of activity and demand stabilization that we talked through in 2024 play out at the start of 2025 as well. To give some snapshot stats, move-in volumes are up a strong 5% to start the year, move-in rates down about 8%. So on a net basis, continued improvement through move-in activity. Move-outs are flat, leading occupancy to be down about 40 basis points year-over-year as we sit here today, compared to where we finished the year down 80 basis points. But we did start the year with move-in rents down 8% or so. As we think about the full year, I highlighted a couple operational metrics to note. You seized on one of them, move-in rents down 5%. So that's obviously an improvement from where we're starting the year today. We expect continued competitive dynamics for new customer move-in rents through the year at the midpoint. We are anticipating that with demand stabilizing that we do see occupancy at a down 10 basis point level on average, an improvement in occupancy through the year. We're already seeing some of that year-to-date. Obviously the high and low end of the range capture better or worse trends on those metrics as well. But we thought that was an appropriate midpoint for our outlook for the year.

Jeff Spector, Analyst (Bank of America)

Great, thank you. And then my second question is on your comments around stabilization. Joe, you started saying that almost all markets inflected and showed broader stabilization. What's driving that? Is it simply less supply? Are you actually starting to see an improvement in demand top of the funnel? Can you talk about that more? Thank you.

Joe Russell, President & CEO

Sure. The moderate, but improving market-to-market demand factor is a positive trend. We spoke to that quarter-by-quarter through 2024 and as Tom noted, that's carrying us into 2025 as we start. We have seen a number of markets that continue to inflect positive. That's a good trend. It's not a dramatic jump forward, but it's clearly not reversing. We're seeing top-of-funnel demand by more Google search, for instance, industry-wide. We are seeing moderate levels of improved activity at the top of the funnel. The thing that we continue to be very encouraged by are all the things we're doing from a conversion standpoint, where customers are coming to us with a higher interest in retaining or attaining self-storage space. Our conversion techniques are continuing to be highly optimized and very competitive. So with all those factors, Jeff, we're encouraged by this moderate but improving market-by-market growth. We're obviously pointing out some of the challenges as I noted in Los Angeles. But holistically, the portfolio at large is still seeing the level of improvement I spoke to, and we're going to continue to diligently capture as much of our fair share of market activity as we can.

Jeff Spector, Analyst (Bank of America)

Thank you.

Operator, Operator

Our next question is from Todd Thomas with KeyBanc Capital Markets. Please proceed with your question.

Todd Thomas, Analyst (KeyBanc Capital Markets)

Yes, hi. Thanks. I wanted to ask about Los Angeles specifically. The impact that you're estimating there amounts to the 100 basis point negative impact on same-store revenue. Can you discuss the underlying assumptions there around occupancy and rate growth? And are you assuming that impact is fairly consistent throughout the year, or is the impact expected to be greater earlier in the year than later?

Tom Boyle, Chief Financial Officer

Yes, Todd, that's a good question. We did provide an estimate for the impact to same-store revenue that clearly flows directly down to core FFO of 100 basis points. The primary driver of the impact is going to be rate; occupancy remains healthy. Los Angeles continues to be a strong market for us in and out of cycles, given the demand and supply dynamics within Los Angeles. The 100 basis points we're speaking to is really a rent restriction and pricing restriction impact. That will have less of an impact in the first quarter, as we're starting here, than it will as we move through the year. So that 100 basis point impact will accumulate as we move through 2025. You can think about that 100 basis points as the right guidepost for modeling purposes.

Todd Thomas, Analyst (KeyBanc Capital Markets)

Okay. And then stepping back and thinking about the portfolio more broadly, can you discuss, within the context of your remarks around continued stabilization and recovery in fundamentals, trends across the Sunbelt versus coastal and more urban markets? The Sunbelt normalized more or experienced a greater deceleration from a higher peak growth rate. It looked like some of those markets stabilized a bit more this quarter and led the way as you look to '25. Does the Sunbelt recover more quickly, or do you see continued volatility there in the near term?

Joe Russell, President & CEO

Yes, I can start. One thing you pointed to is we are still dealing with some of the high-flying markets that saw extraordinary demand through the pandemic. We are encouraged by those markets continuing to progress in the right direction off of those dramatic events and the demand that followed. Another factor is supply itself. Nationally, we continue to see declines more often than not in supply and deliveries of new product. There are still two or three markets we're keeping a close eye on, including Phoenix, Las Vegas, parts of Florida and Atlanta. Those markets are not adjusting as effectively as the nationwide portfolio as a whole. We've been talking about this for the last couple of years, but we continue to see the holistic benefit of fewer deliveries taking place. The development business continues to be challenging from entitlement timing and cost standpoint, coupled with the fact that pro formas often are not matching investment hurdles for many market developers. That too has been a positive trend that we continue to see through 2025 and into 2026. Tom can add other comments.

Tom Boyle, Chief Financial Officer

Yes, the only thing I'd add is some specific market commentary. Last year at this time we were highlighting Seattle, San Francisco and D.C. as markets that were starting to see improvement and that played out through the fourth quarter. We continue to see good trends there. Related to the Sunbelt, there are encouraging trends in some Florida markets; Miami and Orlando both inflected into positive second derivative territory in the fourth quarter. So we are starting to see some improvements further into the Sunbelt, which is encouraging.

Todd Thomas, Analyst (KeyBanc Capital Markets)

All right, thank you.

Operator, Operator

Our next question comes from Michael Goldsmith with UBS. Please proceed with your question.

Michael Goldsmith, Analyst (UBS)

Good morning. Thanks a lot for taking my questions. First on the transaction market, sounds like you have greater visibility into more activity in 2025 than last year. What's driving a more liquid market, and where are acquisition cap rates settling in right now?

Joe Russell, President & CEO

Yes, Michael, a couple things. 2024 ended up being a multiyear low sector transaction year. Very few large portfolios traded hands, and the bulk of the activity was one-off transactions. All told, there was approximately $4 billion of transaction activity in the sector going into the fourth quarter of 2024. We saw a bit of an uptick in the latter half in one-off smaller transactions, and we captured a number of attractive opportunities in the fourth quarter that carried into early 2025. Tom mentioned we've either closed or have under contract approximately $140 million of activity. Between Q4 and Q1, we've taken down about $400 million worth of acquisition activity. It's hard to tell if 2025 will see different levels of larger portfolios coming to market. Last year, a number of larger portfolio dialogues did not result in trades. We'll see how 2025 plays out. There's still potential activity on larger portfolios, but it's hard to predict at this point.

Tom Boyle, Chief Financial Officer

On cap rates, I'd point you to a similar range we've indicated for the last year and a half. Cost of capital and interest rates have moved a bit, but I'd still point to cap rates generally in the mid-fives to low-sixes as the right guidepost, particularly for stabilized properties. Lease-up assets will be different.

Michael Goldsmith, Analyst (UBS)

Thanks for that. And as a follow-up, demand is stabilizing, moving volumes are up slightly, but it's not translating to pricing power for new customers. Is the missing ingredient simply for demand to pick up for pricing power to return, or is there something else that can help generate higher move-in rents?

Joe Russell, President & CEO

Stepping back, industry demand has come off the highs of several years ago. Last year, we called it a year of stabilization. If you look at Google search activity and other metrics, we experienced stabilization through last year and are starting this year in a similar place. That's encouraging because demand is not falling. For 2025, we are not anticipating a significant uptick in demand through the year. We expect trends similar to 2024 for demand drivers. So we're not anticipating a big seasonal uptick or sharp return in housing transaction volumes. It feels like 2025 will feel similar to 2024 across many demand dynamics. If demand does pick up for any number of reasons, that should lead to better pricing power across the industry and better financial performance thereafter.

Michael Goldsmith, Analyst (UBS)

Thank you very much. Good luck in 2025.

Joe Russell, President & CEO

Thanks, Michael.

Operator, Operator

Our next question comes from Juan Sanabria with BMO Capital Markets. Please proceed with your question.

Juan Sanabria, Analyst (BMO Capital Markets)

Hi, good morning. Thanks for the time. Could you talk about expenses and some assumptions behind individual line items? As part of that, could you comment on potential risks from changes in immigration policy impacting labor costs, or a less environmentally friendly administration potentially removing some benefits of solar initiatives you put in place?

Tom Boyle, Chief Financial Officer

All right, that's a lot, Juan. To tick through: for expenses in 2025, the biggest driver will likely be property taxes. Indirect cost of operations will likely increase due to investments we're making on the team there. Those increases will be offset by payroll efficiencies that Joe mentioned and continued improvements in our digital platform as a mitigant. The solar properties added in 2024 will get full-year benefit of reduced utility usage in 2025, and we expect another active year of additions this year. Regarding policy changes toward solar, we'll navigate those as they arise. The investments we've made in solar to date have produced very strong returns—call it 10% to 15% unlevered IRRs on those investments. We view them as attractive investments and are seeing utility savings today. We think there is a big opportunity long term given our sizable roof presence across the country, the likelihood that utility rates continue to rise, and the potential for solar panel prices to decline. So more opportunity exists regardless of policies over the medium to longer term.

Juan Sanabria, Analyst (BMO Capital Markets)

Thanks, Tom. And could you speak about pricing dynamics for new customers and any impacts from the comp period of last year, with achieved rates going up a bit to start the year? I think you said fourth quarter was down 5% and year-to-date is down 8%. Also discuss promotions, which increased a bit in the fourth quarter, and how to think about interplay between promotions and achieved rates.

Joe Russell, President & CEO

Sure. We have three tools we pull at the local market level: promotions, advertising and move-in rents. They each drive different performance among customers—some help top of funnel, some conversion. There was some variability year-over-year in those metrics, but relatively modest over time. Marketing spend as a percentage of revenue was 2.4% in the fourth quarter, roughly consistent with the prior year. We continue to see strong returns on advertising given our strong brand and digital platform investments. Promotions—some near-term first-month promotions were utilized in the fourth quarter. Promotions as a percentage of revenue at about 1.7% remain below historical averages and is a tool we'll consider using into 2025 as well. Move-in rates have been a notable area of competition among storage operators over the last several years and remain a very competitive move-in environment today. We'll use that lever as needed.

Juan Sanabria, Analyst (BMO Capital Markets)

Thank you.

Operator, Operator

Our next question comes from Nick Joseph with Citi. Please proceed with your question.

Nick Joseph, Analyst (Citi)

Thanks. I want to go back to LA and understand the moving parts. If RevPAR is about $36 right now, where's market rent in LA for the purpose of the emergency restrictions? How does that impact new move-ins and ECRIs?

Tom Boyle, Chief Financial Officer

Yes. The state of emergency triggers price restrictions within Los Angeles and Ventura Counties that result in a 10% pricing restriction. Overall, we've estimated and rolled that through our models to result in about a 100 basis point impact to same-store revenue in 2025. That 100 basis points is the right guidepost for modeling purposes.

Nick Joseph, Analyst (Citi)

Right. I mean, I guess the question is how is market rent defined? If you're at $36 right now, what does that do to ECRIs and what does it do as new people move in?

Tom Boyle, Chief Financial Officer

It has an impact to both existing customer rent increases and move-in rents, and we took that into consideration when forecasting the about 100 basis point impact to same-store revenue.

Nick Joseph, Analyst (Citi)

All right, thank you. And on capital allocation, last year you were repurchasing shares and this year you issued. What's the framework for decisions between buybacks and equity issuance?

Tom Boyle, Chief Financial Officer

Yes. The stock is one of the items we evaluate as we think through capital allocation, along with development and acquisition activity. In the second quarter last year acquisition volumes were quite low and seller dialogue was lower. At the same time, our stock was at a level we viewed as undervalued relative to improving fundamentals, so we repurchased $200 million in stock. We anticipate 2025 will be busier for acquisitions and are hopeful more comes to market. We added an ATM program in the fall as an additional tool. Our toolkit includes retained cash flow, unsecured debt and preferreds to fund acquisition activity. We feel we have a lot of great tools to finance the business and activity in 2025.

Nick Joseph, Analyst (Citi)

Thank you very much.

Tom Boyle, Chief Financial Officer

Thanks.

Operator, Operator

Our next question comes from Spencer Glimcher with Green Street. Please proceed with your question.

Spencer Glimcher, Analyst (Green Street)

Thank you. One more on the LA rent restrictions: how much transparency is there on the duration of these restrictions? Do you have any sense of when you'd get an update on a potential extension of the rent cap?

Joe Russell, President & CEO

Spencer, it can vary depending on the circumstances and the latitude the governor or municipalities decide when and where to issue a state of emergency. The impact from the LA fires was significant. The governor extended the state of emergency for a full year, which is somewhat unusual, so it's technically in place through January 2026. From that point forward, we'll have to see what transpires.

Spencer Glimcher, Analyst (Green Street)

Okay. And you provided comments on your development pipeline. Anything you can share about how input and labor prices have changed in recent months and how confident you feel about hitting development yields given fluctuating input prices?

Joe Russell, President & CEO

It's too soon to tell if we'll see near-term labor pressure related to immigration policy in specific markets. We're keeping a close eye on it. Development continues to be a business you need to know well at the local level, understanding cost structure and risks. That creates additional discipline relative to the volume of development activity likely in the coming years. We can maneuver differently than most developers because of our national scale, buying power for component costs, and development skills. It's a changing environment but too soon to tell the degree of the impact.

Spencer Glimcher, Analyst (Green Street)

Okay. Thank you so much.

Joe Russell, President & CEO

Thank you.

Operator, Operator

Our next question comes from Samir Khanal with Evercore ISI. Please proceed with your question.

Samir Khanal, Analyst (Evercore ISI)

Thank you. My question is around ECRIs this year and how you're thinking about that dynamic. As you built guidance, especially with headwinds on the consumer and potentially slower job growth, do you expect ECRIs to hold this year? Broadly how are you thinking about that?

Tom Boyle, Chief Financial Officer

We continue to see strong performance from our existing customer base across metrics like delinquency and move-outs. Our testing and modeling indicates consistent price sensitivity. Big picture, the midpoint of our guidance assumes same-store revenue performance pretty consistent with last year, with a lower contribution from existing customer rent increases in Los Angeles due to the state of emergency. In aggregate across the country, a lower contribution year-over-year is expected, but consistent performance in other markets.

Samir Khanal, Analyst (Evercore ISI)

Thank you, Tom. And as a follow-up, you said move-in rents down 5% at the midpoint. What are you assuming at the high end of guidance?

Tom Boyle, Chief Financial Officer

At the high end of the range, embedded assumptions are about a 3% decline in move-in rents on average. So steady improvement through the year.

Samir Khanal, Analyst (Evercore ISI)

Okay, thank you.

Operator, Operator

Our next question comes from Ki Bin Kim with Truist Securities. Please proceed with your question.

Ki Bin Kim, Analyst (Truist Securities)

Thank you. Can you remind us what the ECRI increases were in LA last year? Just trying to calibrate how much that 1% reserve accounts for a potential limit on ECRIs.

Tom Boyle, Chief Financial Officer

In LA, like every market, we use a variety of increases in both frequency and magnitude. LA was no different than a typical market last year. Again, we would point you to the 100 basis point same-store revenue impact from Los Angeles in 2025.

Ki Bin Kim, Analyst (Truist Securities)

Okay. And are you seeing any signs of increased housing turnover in the D.C. area perhaps related to federal changes?

Joe Russell, President & CEO

We're keeping a close eye on D.C. with a lot of headlines, but it's far too soon to tell and we couldn't point to anything we've seen on the front lines yet.

Ki Bin Kim, Analyst (Truist Securities)

Okay, thank you.

Joe Russell, President & CEO

Thank you.

Operator, Operator

Our next question comes from Caitlin Burrows with Goldman Sachs. Please proceed with your question.

Caitlin Burrows, Analyst (Goldman Sachs)

Hi. Going back to capital allocation, it sounds like you're constructive on the acquisition outlook and equity is one of the tools. Could you comment on target leverage levels, where you are today, and would you look to keep leverage where it is or what would make you want to go lower or higher?

Tom Boyle, Chief Financial Officer

On acquisitions, we are optimistic there will be more activity this year, though we remain reliant on interest rates and seller dialogue. We finished the year with net leverage at 3.9 times net debt and preferred to EBITDA. Our long-term target is four to five times. So we continue to have leverage a touch below our long-term average and have capacity to add leverage through unsecured debt and preferreds. At the same time, our retained cash flow is increasing from $400 million to $600 million this year and we will look to deploy that into the acquisition market as well. We also added an ATM program as an additional tool, but really feel we have many tools to finance activity in 2025.

Caitlin Burrows, Analyst (Goldman Sachs)

Okay. And on development, how much was the portfolio impacted by supply headwinds in 2024 and how does that factor into what you're expecting for 2025 supply?

Tom Boyle, Chief Financial Officer

The industry-wide data indicates new supply as a percentage of existing stock around the country was about 3% last year. We anticipate that will decline to around 2.5% plus or minus in 2025, a modest improvement and part of a multiyear decline in deliveries.

Caitlin Burrows, Analyst (Goldman Sachs)

Thanks.

Operator, Operator

Our next question comes from Ronald Kamdem with Morgan Stanley. Please proceed with your question.

Ronald Kamdem, Analyst (Morgan Stanley)

Hi, just two quick ones. You talked about the benefit of the mobile app and reducing labor hours. As AI proliferates, are there obvious low-hanging fruits, whether in leasing or accounting, where AI could have an impact?

Joe Russell, President & CEO

Yes, Ronald. There are many areas tied to AI relative to the digitalization we've been working on for years. Whether through the app, which now has about a million and a half customers, or how we interface with customers through our care center and website, new tools are being introduced. Penetration and optimization from AI continue to grow. We're cautious about how far we take it step-by-step, but we're seeing a very good balance of skill and impact versus investment. Our digital platform investment is additive not only to optimizing efficiency but to customer satisfaction and conversion. A lot more to come on that front.

Ronald Kamdem, Analyst (Morgan Stanley)

Great. And second, on CapEx and property enhancements being over, is that something that happens every couple years? Is energy efficiency spending something we should expect to go away at some point?

Joe Russell, President & CEO

With a 250 million square foot portfolio, there are ongoing opportunities to improve property infrastructure—HVAC, solar, lighting, and other efficiency investments. The Property of Tomorrow program was about a 20-year cycle where we made a commitment five-plus years ago to rebrand the entire portfolio. That's not something we do every couple years; we expect long-term use of that investment. Day-to-day optimizations like lighting and solar are taken on case-by-case and can deliver strong returns when undertaken. We continue to see good returns on those investments.

Ronald Kamdem, Analyst (Morgan Stanley)

Great, thanks so much.

Joe Russell, President & CEO

Thank you.

Operator, Operator

Our next question comes from Mike Mueller with JPMorgan. Please proceed with your question.

Mike Mueller, Analyst (JPMorgan)

Hi, two more LA questions. First, are the headwinds in the forecast coming only from lower ECRIs? Are you not able to have a normal seasonal lift in move-in rates as you move into spring? Second, how different would your year-over-year move-in rate assumption of down 5% be if you strip LA out?

Tom Boyle, Chief Financial Officer

Two components: the primary driver of the 100 basis points is existing customer rent increases. Move-in rents in Los Angeles were a little bit better than the company average before the state of emergency and continue to be, which speaks to the strength of overall fundamentals in LA. On net, the rest of the country was probably a bit worse than LA going into the state of emergency. The state of emergency pricing restrictions aren't likely to have a significant impact on move-in rents and are more likely to impact existing customer rent increases.

Mike Mueller, Analyst (JPMorgan)

Got it. Thank you.

Tom Boyle, Chief Financial Officer

Thanks.

Operator, Operator

Our next question comes from Brendan Lynch with Barclays. Please proceed with your question.

Brendan Lynch, Analyst (Barclays)

Thanks. On acquisitions, any particular markets or urban versus suburban characteristics you're targeting, or any other property characteristics?

Tom Boyle, Chief Financial Officer

Brendan, we don't limit focus to a single priority such as urban or suburban. It comes down to the quality of the individual asset and how we see value creation relative to positions we already have in a market. For larger portfolios, benefits can come from multiple assets in multiple markets. Our underwriting looks at individual assets and the value they bring to scale and market effectiveness. So we won't limit ourselves by geography or urban versus suburban characteristics and will continue to see opportunities across the spectrum.

Brendan Lynch, Analyst (Barclays)

You're guiding to lower street rates year-over-year but not giving up much on occupancy. Can you explain your thought process on these components and where you'll be firmer versus more flexible?

Tom Boyle, Chief Financial Officer

We've spoken about move-in rent assumptions relative to occupancy assumptions and the expectation of stabilization in demand. We've seen declines in occupancy over the last few years but less so each year and anticipate that trend again this year. Ultimately, we're looking to maximize overall revenues, not target occupancy or rental rates specifically. That's how we think about pricing algorithms and optimization processes day-to-day. In the guidance range, occupancy is expected to be better on the high end and a little softer on the low end. Generally, we expect relatively flat occupancy across the year against the demand backdrop.

Brendan Lynch, Analyst (Barclays)

Great, thank you.

Tom Boyle, Chief Financial Officer

Thanks.

Operator, Operator

Our next question comes from Omotayo (Tayo) Okusanya with Deutsche Bank. Please proceed with your question.

Omotayo Okusanya, Analyst (Deutsche Bank)

Good morning. Consumer sentiment data came out today showing a softer consumer and many retailers spoke about softer activity this week. How are you thinking about that in the context of demand and pricing, at least in the near term in the first half of '25?

Tom Boyle, Chief Financial Officer

Retailers have consistently pointed to a softer consumer over the last several years. One benefit of storage is that the customer cohorts that moved in over the last several years have been some of our stronger cohorts in terms of delinquency and move-out trends. While retailers are seeing one thing, storage customers continue to be resilient, and we're experiencing that into 2025. We have seen overall demand for storage come down from the highs of 2021 and discussed mix shifts between housing transactions and people needing space at home. Overall, we view 2025 as a year similar to 2024 across those metrics and are encouraged by customer behavior through 2024 and to start 2025.

Omotayo Okusanya, Analyst (Deutsche Bank)

Thank you.

Tom Boyle, Chief Financial Officer

Thanks.

Operator, Operator

Our next question comes from Caitlin Burrows with Goldman Sachs. Please proceed with your question.

Caitlin Burrows, Analyst (Goldman Sachs)

A follow-up on development yields: you disclose prior years' developments and yields. For recent developments and projects in process, can you give color on how you expect them to lease up, the pace to reach stabilization, and whether that has changed in recent years?

Tom Boyle, Chief Financial Officer

We continue to underwrite and target roughly 8% yields and have met or exceeded those in prior vintages. For lease-up pace, we consistently underwrite around three to four years to reach stabilization. We did see faster lease-up at the peak demand vintages in 2020 and 2021, but consistently expect three to four years from initial opening to stabilization.

Caitlin Burrows, Analyst (Goldman Sachs)

Got it. So 8% target over three to four years remains the plan?

Tom Boyle, Chief Financial Officer

Yes, that's right. We think that's a very strong risk-adjusted return and will continue to target it.

Operator, Operator

We have reached the end of the question-and-answer session. I'd now like to turn the call back over to Ryan Burke for closing comments.

Ryan Burke, Investor Relations

Thanks, Rob. And as always, thanks to all of you for joining us. Have a great day.

Operator, Operator

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.